Company Review: Canadian National Railway Company (CN)

Company Profile: Canadian National Railway Company (CNI) (obtained via Google Finance)
Canadian National Railway Company (CN), directly and through its subsidiaries, is engaged in the rail and related transportation business. As of December 31, 2005, the Company had a network of approximately 19,200 route miles of track. CN’s network spans Canada and mid-America, from the Atlantic and Pacific oceans to the Gulf of Mexico, serving the ports of Vancouver, Prince Rupert, British Columbia, Montreal, Halifax, New Orleans and Mobile, Alabama, and the cities of Toronto, Buffalo, Chicago, Detroit, Duluth, Minnesota/Superior, Wisconsin, Green Bay, Minneapolis/St. Paul, Memphis, St. Louis and Jackson, Mississippi, with connections to all points in North America. The Company’s revenues are derived from the movement of seven commodity groups, including petroleum and chemicals, grain and fertilizers, coal, metals and minerals, forest products, intermodal and automotive.

Business and Management Review
1) Is the business simple and understandable?

Given the nature of the railway business and based upon our previous analysis, this is a simple industry to understand.

2) Does the business have a consistent operating history?

Railroad transportation has had a long history and has been profitable as well. Again, please refer to previous posts to learn more about the history of this industry.

3) Does the business have favorable long term prospects?

As long as companies need to transport in a manor that is safe, reliable, and economic the railroad industry will exist. There is competition from the air and land, but railroads have the ability to move mass amounts in a fairly quick timeframe.

4) Is management rationale?

This company is lean and is beating their competitors in almost all major financial aspect. Please refer to reuters detailed comparison of the company versus industry and market averages. We are pleased with the actions management are taking, especially in keeping their debt to equity ratio below that of the industry which reduced interest expense and lowers financing costs.

5) Is management candid with its shareholders?

Investor relations for the company incorporate all the relevant information an investor would desire. There are some added features on their site, but for the most part it contains the type of information we have come to expect in the 21st century.  

6) Does management resist the institutional imperative?

We are confident in our position that management is acting responsibly by looking forward and not loading the company with too much unnecessary debt.

Financial and Value Review
Defensive:

1) Size of firm

Market capitalization is over $23 billion which is more than enough to pass this test. Pass.

2) Strong financial condition

The companies current ratio rest at roughly 0.58 which is far below the required 2 level, therefore, they fail this test. Fail.

3) Earnings stability

There has been positive net income for the ten years prior. Pass.

4) Dividend record

The firm has paid a dividend consistently for the past ten years. Pass.

5) Earnings growth

EPS has increased by at least one third over the past ten years. Pass.

6) Price to earnings analysis

With a P/E ratio of roughly 26, the firm is above the benchmark of 20. Fail.

7) Price to book analysis

With a P/B ratio of over 2.60 the firm is above the 2.5 requirement. Fail

Conclusion:

The company fails the overall test for the defensive investor, and would not be an appropriate selection.

Enterprising:
1) Strong financial condition

Current ratio is below 1.5. Fail.

2) Earnings stability

They have had positive net income for the past five years. Pass.

3) Dividend record

The firm does currently pay a dividend. Pass.

4) Earnings growth

Earnings are greater than five years ago. Pass.

Conclusion:

The firm passes the overall test for the enterprising investor, and would be a fine choice for this classification of investor.

Valuation:

We find a fair market price for Canadian National at $71.00 per share.

Opinion:
Given the current market price of around $52.00 we find this stock an extremely attractive choice for the enterprising investor. We expect that there is much upside potential in the long term.

Neither of us held a position in Canadian National at the time of publication.  Also, please read our disclaimer and Our Methods.

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This is the seventh part of our study of the Rail Transportation sector.  Please come back in the next couple weeks for the following articles:

Monday, January 8 – Jon – Burlington Northern Santa Fe (BNI)
Tuesday, January 9 – Ben – Union Pacific Corporation (UNP)
Wednesday, January 10 – Jon – Kansas City Southern (KSU)
Thursday, January 11 – Ben – Providence & Worcester Railroad Co (PWX)
Monday, January 15 – Jon – The Greenbriar Companies (GBX)
Tuesday, January 16 – Ben – Genesee & Wyoming Inc. (GWR)
Wednesday, January 17 – Jon – Canadian National Railway (CNI)
Thursday, January 18 – Ben – Norfolk Southern Corporation (NSC)
Monday, January 22 – Ben – Overall Industry Analysis & Introduction of Next Industry

 


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